Supreme Court Will Hear Tax Incentives Case

Published December 1, 2005

The U.S. Supreme Court could hear oral arguments in January regarding the Cuno decision, a ruling that invalidated an Ohio investment tax credit and threw into question targeted business tax incentives across the country.

The Court announced on October 4 that it would hear arguments in the case, which the U.S. Court of Appeals for the Sixth Circuit decided on September 2, 2004. The ruling in Cuno v. DaimlerChrysler struck down Ohio’s Investment Tax Credit for a Jeep manufacturing plant in Toledo, saying the tax incentive impeded interstate commerce.

Court Saw Coercion

The Sixth Circuit ruled the economic effect of Ohio’s Investment Tax Credit was to coerce businesses to invest in Ohio, because of the tax favoritism.

The arguments center on a $281 million incentive package Ohio granted DaimlerChrysler for a Jeep manufacturing plant that opened in Toledo in 2001 and employs 3,800 workers. Plaintiffs in the case claimed “the economic effect of the Ohio investment tax credit is to encourage further investment in-state at the expense of development in other states and … the result is to hinder free trade among the states.”

Judge Martha Craig Daugherty, writing for the unanimous three-judge panel, agreed with the plaintiffs.

“The business that chooses to expand its local presence will enjoy a reduced tax burden, based directly on its new in-state investment,” Daugherty wrote, “while a competitor that invests out-of-state will face a comparatively higher tax burden because it will be ineligible for any credit against its Ohio tax.”

Ruling Allows Some Incentives

The Sixth Circuit did not throw out the entire incentive package. Its ruling struck down $70 million of the state’s Investment Tax Credit but allowed local property tax abatements. The court allowed the local abatements because they do not “impose specific monetary requirements, require the creation of new jobs, or encourage a beneficiary to engage in an additional form of commerce independent of the newly acquired property,” its ruling stated.

Shortly after the ruling, Diann Smith, general counsel for the Council on State Taxation (COST), whose 550 corporate members include DaimlerChrysler, said, “One of the troubling aspects of the Sixth Circuit opinion is that they don’t make clear, and there doesn’t appear to be, a legitimate distinction of how [targeted tax incentives] offered by a state would be different from a state that chooses to have a lower or no income tax. The problem is there is not a principled analysis about where the line should be drawn.”

COST is working for federal legislation that would guarantee states could offer targeted tax incentives like those struck down in the Cuno ruling.

Bad Policy, Not Discrimination

The Cuno ruling opened the door to additional lawsuits targeting economic development incentives in almost every state, according to Chris Atkins, staff attorney at the Tax Foundation and author of an amicus brief that asked the Supreme Court to hear the case.

Atkins said, “Our argument is that state tax incentives and credits are not good tax policy, but they don’t discriminate against commerce. The Sixth Circuit in the Cuno ruling threatened tax competition. That’s what bothers us.”

Atkins said the Tax Foundation was urging the Court to bring needed clarity to its Commerce Clause doctrine. He argued that under the Cuno ruling, the states within the Sixth Circuit–Kentucky, Michigan, Ohio, and Tennessee–would be disadvantaged compared with other states. Additionally, he said, the Cuno decision could end all tax competition among the states.

Atkins said while the Cuno ruling specifically attacks preferential tax credits, it is so broad that a state that reduced tax rates overall or eliminated a tax could be seen as violating the ruling, because the reduction or elimination of the tax might encourage companies to relocate there.

“The Commerce Clause of the Constitution was designed to encourage competition, including tax competition, between the states,” said Atkins in a statement announcing the Supreme Court’s acceptance of the case. “Since the Cuno ruling imperils all forms of state tax competition–not just tax incentives for companies–we applaud the Court’s decision to hear the case.”

Atkins acknowledged some ambivalence over the matter. The Tax Foundation usually advises states against enacting targeted tax relief packages, because the organization believes such incentives are poor tax policy and favor large, politically connected businesses at the expense of other businesses and individuals. But he said states need to be able to shape their intrastate tax climate.

“I’ll bet lawmakers in a lot of high-tax states would like to not have to compete on taxes,” Atkins said. “We believe as long as these [tax incentives] don’t discriminate against out-of-state taxpayers, they’re fine.”

An Opposing View

The Tax Foundation’s action has brought opposition from Michael Mazerov, writing for the Center on Budget and Policy Priorities. Mazerov argued the Tax Foundation is wrong in interpreting the Cuno ruling as threatening all tax competition between states, not just incentives targeted toward specific firms and industries.

In a July 20, 2005 article (“Tax Foundation’s Analyses of the Cuno Decision: Inaccurate and Inconsistent”), Mazerov wrote the Tax Foundation “has fundamentally misread the decision itself and the Hellerstein/Coenen theory underlying it. This misreading leads the Foundation to conclude that Cuno is a bad means to a justified end. A more careful reading of the decision and the Hellerstein/Coenen analysis should lead to the conclusion that none of the adverse side-effects of the decision asserted by the Tax Foundation are likely to transpire.

“Free-market-oriented organizations like the Tax Foundation should support Cuno as a move toward economically neutral taxation and should oppose proposed federal legislation that would reverse it,” Mazerov continued.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.

For more information …

Information on the Cuno v. DaimlerChrysler ruling can be found online at and at

PolicyBot™, The Heartland Institute’s free online research database, offers more than five dozen documents on tax incentives. Point your Web browser to, click on the PolicyBot™ button, and choose the topic/subtopic combination Economic Development/Bidding for Business.